This week, Kelsey joins me to chat about a topic that we get asked about a lot from our clients:  team bonuses. 

As the end of the year approaches, many entrepreneurs may be wondering about the different options they have for giving team bonuses and how they can prepare for giving annual bonuses throughout the year. 

Join us in this episode to hear how you can get a head start on your team bonuses now for next year and how you can assess your teams performance. 

In this episode, Danielle also discusses: 

  • Why you might give a team bonus 2:05
  • What to base the bonus off of 4:03
  • Preparing for annual bonuses throughout the year 5:44 
  • Bonus pools 7:27
  • Assessing your teams performance 9:41
  • Different ways you can give a bonus 11:30
  • Setting yourself up for giving a bonus next year 17:45

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Full Episode Transcripts:

Intro  0:00  

Welcome to entrepreneur money stories, the podcast for women entrepreneurs who want to dig into their money stories so they can break free from limiting beliefs around money once and for all. Hosted by Daniel Hayden, owner of kickstart accounting, Inc. This podcast is a series of real conversations about money mindset with valuable and action packed takeaways for the entrepreneur who’s building their abundant empire. Danielle is a reformed corporate CFO who’s on a mission to help real female entrepreneurs understand their numbers and gain the confidence to create sustainable profits. And now here’s your host, Danielle Hayden.

Danielle  0:40  

Welcome back to another episode of entrepreneur money stories. We have Kelsey, back on the show. Kelsey, welcome back. Thank you for being here.

Kelsey  0:47  

Thank you for always loving it. Today,

Danielle  0:50  

we’re gonna be talking about another question that we get from our clients all the time, especially at this time of year, however, don’t have to wait for the year end, how to give your team bonuses. This is a topic that can be really difficult for business owners. Not only are we talking about money, we’re talking about our financial statements. But we’re also talking about our team who are the people who are closest to us and the people who we want to compensate and reward and help us share the progress of our clients’ businesses. So this is a topic that I know is that easy. Right? So this is a difficult episode for people. But I think that there is, there’ll be an opportunity for you to walk away with a very clear structure on how to end the year and look at team bonuses moving forward. Because how often do you think you get this question? I mean,

Kelsey  1:48  

Especially around the end of the year like this, I mean, honestly, at least once a week, it’s definitely a hot topic right now. And something we really wanted to put a lot of focus on to help you out when you need it. 

Danielle  1:59  

Alright, so why do we see our clients providing bonuses, what’s driving this?

Kelsey  2:05  

So there’s a few good reasons why an employer would give employees bonuses at the end of the year, one being to reward a good performer so you can give your top performers bonuses to really thank them for their hard work this year. If there’s a certain compensation number that an employee would like to make, you can bonus them to kind of meet that for them in lieu of raises. That’s an example of a reason that an employer would give a bonus, it’s a little less permanent and a little bit less of a commitment, yet the entire amount of compensation would be met also as ways to reward meeting preset benchmarks. So whether it be sales goals, performance goals, anything like that you can reward bonuses to your employees for helping a company reach those goals.

Danielle  2:50  

Yeah, I think we’ve I’ve seen over the years, there have been different motivators that drive for that drive, the bonuses, the motivator might be the business had a really awesome year, right. So as the business has experienced growth, being able to share that growth with your, with your team and be able to compensate for them. So they might not even be preset benchmarks. But it might be you as a business owner, that your goals have met your profitability goals, or sales goals, or you guys just had a great year. So that might be the driver of that decision to bonus, the driver might be performance, just have an understanding that your team has gone above and beyond what their job expectations are, and really move the business forward. And so maybe the business didn’t actually do that great this year, or you didn’t hit your goals. But the driver is that despite not hitting your goals, that team member really went above and beyond regardless. So you might still set aside the cash and still set aside the funds in order to be able to compensate those team members. But the driver isn’t the success of the company. It’s the success of the team. It doesn’t always have to be that we had a great year, let’s give it all back to our team. It might be just that we did important things to determine what the driver is.

Kelsey  4:12  

That’s a great point I get asked about pretty often. You know I want to give my team a bonus but I don’t really know what exactly to base it off of. And it’s really whatever you want to base it off of, you know what, what drives your company, what drives you, what drives your employees, and just kind of go from there. There’s no preset figure to base your bonus off of

Danielle  4:32  

any reason not to give bonuses and I’m thinking of one specific client call that we had this week, but any reason not to give bonuses on an annual basis.

Kelsey  4:43  

I can think of a couple of number one concerns if the business doesn’t have enough cash currently, you know, it’s always a good idea to have a little bit of a cash cushion, at least a month of operating expenses. If you don’t at least have that you may want to hold off on the bonuses. Another is to keep in mind that when you when you issue a bonus, you’re kind of setting the precedent that this may happen in the future. So if you feel like your business is not there yet, I would hold off until you feel like the business is more ready. Yeah.

Danielle  5:16  

And does it mean that you do have to give the bonus every year moving forward, there could be an anomaly, right? This year was great, or this year, you did great. And I want to share this with you. But delivering the communication to your employees in a way that doesn’t create an expectation moving forward. So just being aware that that might create expectations moving forward. And so you want to deliver that communication to the team. So that it’s really, really clear as to why they’re getting the bonus. But always keep in mind that we can only do this, if we have the cash now, by the time that this podcast goes live, it’ll be too late to save for bonuses this year. However, because you’re listening to this, you can set yourself up for success next year. You know, this is something that I’ll share with Kickstarter accounting, we are always thinking ahead. And so we’re making sure that we’re saving for it. I’m a big proponent of profit first or making 1% changes in our business. So how can we prepare for annual bonuses throughout the year? It’s by making small deposits into a savings account throughout the year.

Kelsey  6:25  

Exactly. So if you have decided that you are ready to get bonuses this year, Danielle, how can a business owner go about deciding how much to give?

Danielle  6:33  

Yeah, so all goes back to a reason why you need to have bookkeeping in place and an opportunity to be able to look at your numbers on a regular basis. So the first step in this process would be to look at your profit last year to date. Now you can go into really fancy calculations trying to estimate how you’re going to end the year, I really don’t think that’s necessary. If you want to be able to give bonuses before year end and have it as a habit as a tax deduction or a cash expense for this year, you’ll need to give those bonuses before December 31. So if you’re doing it in this calendar year, you would review your profit and loss for the rolling last 12 months or your profit and loss year to date. And the idea is to understand how much have you had as a profit year to date. Again, if you’re the driver of creating bonuses and because you are profitable this year, and you want to share those profits with your team, looking at how profitable your business is and then creating what I call a bonus pool. And the bonus pool should not be all of your profits. So that you no longer have to pay taxes. And so you don’t want to set aside all that money and then not pay taxes. The idea is to look at what your profits are, look at what your profits were last year. And what is your cash balance today, or cash balance by the end of the year, and be fiscally responsible, right, really think about what your business can afford, and create a bonus pool, I would call it a bonus pool. But it’s really just a set amount of money that you are then going to use to allocate to the other team members, we always talk about a figure called the true cash balance. And I want to elaborate on that for a moment. Because I think it’s really important. The cash balance isn’t necessarily the cash balance in your bank account today. The cash balance is cash today, minus one to three months worth of operating expenses, plus at least one one to three months worth of debt payments. So we want to be able to maintain our business, we cannot let the bonuses derail business from functioning. Again, we’re not making this decision, this decision because we don’t want to pay taxes, we’ve seen it done. And then really cripples businesses. We’ve had clients in the past where they were told, Well, you don’t want to pay this money in taxes, go ahead and bonus it all up to you and your team. And then they weren’t hurt. They were really put in a position all year round. They were trying to make up for that. So we don’t want you to be in that stage. So look at your cash balance, and find out what your true cash balances. So minus one to three months of operating expenses, one to three months of debt payments. Once you have that tick a Google Doc or an Excel sheet and list out each of your team members and you’re thinking in terms of HR, you don’t want to treat one team member differently than another team member. However, you can assess performance and so you don’t have to give the same amount to every single team member. You can make a list of team members and determine how your company works, so if somebody asked you about this, you have a specific way that you made this decision and you Have you predetermine those categories? And this can include tenure. So how long has a business been? How long has an employee been with your business? What’s their background and experience? Well, if that’s important to you, just because somebody has been with you for five years doesn’t mean that they have to get the biggest bonus, there can be somebody who’s new on the team that is making a huge contribution. So if it’s important to you, one of your predetermined categories can be tenure background and experience. The second would be the performance grade. And this can be really simple. ABC, right? I always like A plus B plus, but don’t think it’s okay with yourself, make this really simple ABC? And then? And then lastly would be what’s there above and beyond the contribution? So ABC might be? Do they do their job? And do it well, right? Are they hitting all of the milestones? Are they? Are they delivering projects on time, are they hitting the deadlines that you’re requesting as as their leader, and then who is going above and beyond so these are the three suggested categories, that then you can use, then you can take your bonus pool, and allocate the bonus pool to each individual until you come to zero. But having those categories allows you to systematically apply that pool to each person without it getting really emotional. Because at the end of the day, this can be an emotional task. And so I want to, as much as we possibly can, make this quantitative data driven and take the emotion out of it. I also want

Kelsey  11:39  

to reiterate that only give a bonus if you want, you know, extra that you want to, you’re already going to and not for tax purposes only. We always say you know, don’t spend $1 to save 50 cents, this is definitely a time of year in an area where I see businesses spend unnecessarily, only in the name of tax savings. So just keep that in mind as well.

Danielle  12:04  

Yeah, beautiful suggestion. I just want to make sure that everyone can go into next year, not like we can’t avoid paying taxes. So let’s make good business decisions throughout the year so that we can go into next year really

Kelsey  12:20  

strong. So in what ways can we give a bonus.

Danielle  12:23  

So there’s several options in order to be able to provide bonuses, they can be done most traditionally as a bonus through your payroll provider. We use gusto with most of our clients. And so you can give the bonus in an area in gusto called a bonus, I want to mention this because gusto will adjust the taxes for your employee, you don’t want to create a situation where your employee now has to pay taxes and is in a position that doesn’t feel good for them come tax season. So gusto does have a protection. And they are where they do tax your employee at a higher rate when you give bonuses at that category level. So commissions bonuses are normally taxed at a higher rate, you do not want to give it to them in a reimbursement or regular earnings. You really want your payroll provider to take those taxes out. If your employee situation ends up being that they get a refund, then that’s great for them. But you don’t want them to be in a position where they’re upset contest season that we didn’t have enough withheld. So most Traditionally, it would be a bonus through your payroll provider, there is an option to give gift cards. But we fully want to give this caveat that you cannot give an employee a gift card for $1,000. It’s really anything over $25. You need to go through the payroll and they do need to pay taxes on it. If you go to I don’t know, I don’t know what you have. We have Cheney golf by us and you get guest perks which enable it and so it’s really awesome to go to China eagle and get a bunch of gift cards. However, it’s not a business expense if you cannot verify where those gift cards are going. So anything over $25 We really want to make sure that’s going through their payroll. And then lastly, there is an option for 401 k profit sharing. I don’t want to go into a rabbit hole here. We’re going to be doing a whole other podcast episode on this. But if you have a 401k in place for you and your employees, then talk to your 401 K provider about the possibility for profit sharing.

Kelsey  14:37  

And I want to add another question that I get a lot is can I bonus my contractors? The answer is yes. However, just keep in mind it does need to be added to their 1099 at the end of the year.

Danielle  14:47  

And if your bonus to your contractors, are they starting to flip to employees and this is a really great time to think about. Do you have contractors that really should be paid as employees talk to your money about getting payroll set up. Kelsey and I both agree that it is a good decision. And there’s a whole podcast episode on this as well, if you’re not sure on how how to classify contractors or employees, however, it is easier in the long run to pay the employer taxes and convert your contractors to employees that end up being in a situation where a contractor feels like they were an employee and should have been paid. Now, that format. All right, we talked a little bit about well, I guess we kind of talked about tax implications, any other tax implications, Kelsey, that you could think of on each type of bonus,

Kelsey  15:37  

nothing other than just to clarify, whichever way you bonus, the tax effects for your business are the same, whether it’s through payroll or just keep in mind that you will have to pay a payroll tax on top of the bonus amount. So keep that in mind as you calculate and play around with how much you want to give as a bonus, if you’re doing it through payroll, everything else is a deduction just as regular wages would be

Danielle  16:00  

if someone loves the idea of creating a bonus system, but it’s not prepared. Right now. What steps can they take right now to start thinking about implementing bonuses moving forward? I know that this episode is going to air and people are like, Oh, my God, I wish I would have thought about this sooner. I want to be able to do this and there becomes kind of a FOMO, right, like, Are my employees missing out? Am I missing out on this opportunity? So how can somebody be prepared to possibly do something this year or in the future?

Kelsey  16:29  

Yeah, so this is also a hot time for creating a budget. So as you create your budget and figure your payroll expenses, go ahead and, and budget for a bonus at the end of the year for yourself or for your team. So that it’s at least factored in there. When you go through your revenue goals and what your profit at the end of the year would look like. It’s what the bonus factored in there. And I would definitely start small. So again, you know, unless it’s communicated extremely clearly to you there is a potential to set the precedent that you know, your team will get a bonus like this every year. So just keep that in mind, start small and save over time, like Daniel said, just a certain percentage into a savings account. And you know, sometimes people think you only need to have or should have one savings account. If you have a large purchase or large outflows of cash at any point. Start a savings account just for that. That way you know exactly how much you have allocated for that large purchase. So, you know, maybe 1% of your sales every month goes to your bonus savings account. There is nothing wrong with that. And it’s super easy for you as a business owner to see how much you have for bonuses at the end of the year. And again just we highly suggest discussing expectations with the team beforehand to really make this an exciting time and not a disappointing time.

Danielle  17:55  

Hey podcast lovers, I hope you’re enjoying another amazing episode of entrepreneur money stories. I had to interrupt to tell you about an exciting new tool we recently launched. If you’ve been wanting to learn how to start managing your business finances, but don’t know where to start, then visit kickstart accounting To receive our new five day video bootcamp series, you will receive a video each day that will take you from accounting overwhelm to money powerhouse. So you’re ready to kickstart accounting All right, that’s an episode. The one other thing that I can think of that you can do to set yourself up for next year might be to think about what benchmarks you’re going to have next year to possibly bonus for next year. You don’t necessarily have to share all those with your team, but they can be benchmarks that you want to hit. So going back to the budget, once you’ve created that budget, what metrics do you want to hit in order to be able to provide this opportunity to your employees? And is there anything that you that your team has control over? If they have an opportunity to make a change in that area, then you can tie the bonus opportunities to those areas. If they are, they don’t have the opportunity to make any changes, it can be frustrating for a team member to hear if we grow our sales by 25%, but they can’t really make a difference. That might be a metric that you hold internally as between you and your money team and keep an eye on it throughout the year. But if there is a behavior change or something that your team can actually have an impact on. That might be a benchmark that you communicate, saying, Okay, we would like to launch a bonus plan. Here are the behavior changes, here are the things that we would like to achieve and then give them the opportunity to achieve them throughout the year. You don’t necessarily have to clarify exactly what amounts you can let them know that at the end of the year based on profits, we will create a bonus pool and allocate the bonuses at that time. So just a few ideas to get the wheels turning. Always talk to your money team about what’s the best for you in your situation. And in your employees, Kelsey, anything else that you can think of?

Kelsey  20:21  

I just wanted to add one thing about the benchmarks. So you have your internal goals and benchmarks for your business. And the benchmarks that you give to your team can tie into those, so you don’t have to tell them. My goal is for the business to have a 50% profit percentage this year. You know that to get to that goal, your team has to accomplish this benchmark. And that’s what’s assigned to them for the budget pool. So I hope that makes sense. Yeah.

Danielle  20:49  

If anybody has any questions, again, I know this was a loaded topic, and it was going to be a really emotional topic for people. We are always here and available for you, you can shoot us a DM on Instagram at kick started counting, because then it’s an email at support at Kickstarter counting And if you are a current client, I cannot encourage you enough. Please go book a call with your team, your bookkeepers, your account manager, they want to talk to you and they want to talk to you before year end. So don’t wait until January to start talking about this. We really need it in order for this to be a business expense for this year. We have to make this decision before year end. We have to submit this through payroll and have the cash impact of this before your end. So don’t wait until the time fills up really quickly. So please, book a call. Don’t be a stranger. We’re here to be

Kelsey  21:40  

a resource for you. That’s right, I couldn’t say it better myself. We’re here to support you. So we would love the opportunity to do so.

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